Conventionally, a counterparty in a transaction of the type relating to the present invention would be unable to sell a share purchase contract to a company which would require the counterparty to hedge by shorting shares into the market (as would be the case with a share purchase contract having the economic substance of a put option) because such short sale activity would require a prospectus. An embodiment of the present invention solves this issue through a mechanism of selling borrowed shares to the company (this type of short sale is allowed because the short sale is to the company and not to the market) and then hedging its risk as if it sold a call option or call spread (which would require the counterparty to hedge by buying shares in the market which is an activity that does not require a prospectus (and not short selling in the market)).
Further, it is noted that tax regulations would typically prevent a company from deducting interest payments for debt that can be repaid in shares. Therefore, an embodiment of the present invention separates the share purchase contract from the debenture by having a third party (e.g., a bank) purchase the debenture. In order to swap the economics (credit spread) of the debenture back to the counterparty the invention may use a total return swap. The purchase contract may be structured to allow the counterparty the right to deliver to the company consideration to pay for the share purchase consisting of cash and/or the company's own debt securities. This feature may allow the counterparty to effectively offset its credit risk to the debenture (that it has through the swap) with the amount it would owe the company in a bankruptcy. As an example (which example is intended to be illustrative and not restrictive), if the company went bankrupt (and the debenture is defaulted) then the company's share price would go to zero and the counterparty would owe the company an amount which it could pay using the defaulted debenture as payment. Also, giving the choice of delivery of consideration in the share purchase contract may lower the price of the share purchase contract (which may be advantageous because payments of premium under the share purchase contract are believed to be not tax deductible and therefore the invention minimizes this inefficient portion of the transaction).
Among those benefits and improvements that have been disclosed, other objects and advantages of this invention will become apparent from the following description taken in conjunction with the accompanying figures. The figures constitute a part of this specification and include illustrative embodiments of the present invention and illustrate various objects and features thereof.